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With Pandemic Concerns Lingering, Global Institutions Turn to Strengthening Portfolios

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  • More than Half See Pandemic-Driven Portfolio Shifts on the Horizon; Look to Multi-Asset and Alternative Approaches for Portfolio Resilience
  • Global Investors Seek Clarity on ESG as “Alpha Driver”
In 2021, the ongoing global pandemic will be the primary driver of change in the portfolios of major institutional investors worldwide, with investors increasingly turning to multi-asset and alternative strategies to preserve portfolio resilience and returns, according to the findings of a new survey of 700 global institutional investors and consultants released today by Nuveen, the $1.2 trillion investment manager of TIAA.

A world in transition and 2020’s societal ferment also have driven many investors to take a fresh look at organizational inclusion and diversity practices – at the same time that crisis has brought some new approaches to the daily work of investing, including the due diligence process.

“With simultaneous crises in global public health as well as in economies and markets worldwide, 2020 offered us an extraordinary opportunity to assess the practices and attitudes of major institutional investors in managing both portfolios and day-to-day operations,” said Michael Perry, Head of Nuveen’s Global Client Group.

Pandemic’s Lingering Fallout

Most investors are still evaluating how they will adjust their portfolios given pandemic-related macro-economic concerns, but clearly they are continuing to monitor the fallout of the crisis, the survey indicates.

In late 2020, 79% of investors said they had made no significant changes to portfolios at that point due to the COVID-19 pandemic. However, more than half (52%) reported the pandemic market impact will drive portfolio changes in 2021— the most often cited factor.

Market volatility and interest rate changes were the two next most important factors, both cited by 42% of investors.

The survey also indicates that, when adopting new strategies, investors will be heavily reliant on multi-asset approaches. Global investors cited multi-asset as the most favored approach for portfolio construction (58%), with liability-driven investment (LDI) at 36% and outcome-focused/oriented strategies at 35%.

Use of Alternatives Expanding, With Shift to Private Markets

In another signal of portfolio management challenge and opportunity for major institutions, investors are giving stronger consideration to the private markets for alternative investment strategies, while also grappling with significant hurdles to implementation.

Eighty-six percent of institutional investors currently invest in alternatives and, of those now invested, two-thirds plan to increase their allocations in 2021.

Increasingly, many investors are directly sourcing their own investments, such as buying real estate or securing their own private equity deals; of those who currently have an alternatives allocation, 80% are invested in real estate, 70% in private equity and 63% in infrastructure.

More than half (55%) of alternatives investors said they plan to make a strategic shift away from public to private markets in the next 12 months.

“In a low-return environment, the shift to private asset classes and other alternatives has accelerated as more and more investors search for sources of alpha that are ‘idiosyncratic’— that is, not strongly correlated with other kinds of assets,” said Mr. Perry. “Rather than tapping private markets opportunistically and tactically to boost returns, investors are making private investments a more strategic and critical part of their investment approach.”

But challenges to even greater deployment persist. Nearly half (48%) of investors believe allocations to alternatives and private markets will increase because they consistently deliver better returns than public investments. However, 53% also agree that it is difficult to find true, idiosyncratic alternatives.

More than half (53%) of alternatives investors are looking for more specialized, off-market alternatives opportunities and 58% are seeking new strategic partnerships for co-investment. Nearly seven in 10 (69%) say they also plan to seek out in 2021 alternative investments that are oriented toward environmental, social and governance (ESG) factors.

Values/Responsibility Drive ESG Investment

Investors say that making a social impact is currently their top motivation for integrating ESG into portfolios.

About one third of investors (34%) list “organizational values and sense of social responsibility” as the primary driver of their ESG integration efforts.

ESG integration is increasingly a “mainstream” investing approach, but investors don’t necessarily agree that it has a central role in their investment decision-making.

More than 70% of investors agree that ESG is about integrating material ESG factors into their investment decision making. However, only four in 10 (39%) currently agree that ESG factors are valid drivers of alpha. While 59% believe ESG can help mitigate headline risk, only 36% currently agree that ESG factors are on par with other investment factors when evaluating risk/return profiles. Only 26% percent agree that “ESG is a trend rather than a core, long-term investment strategy”; 22% are neutral on the statement, while 53% disagree.

For 54% of investors, validating “ESG as an alpha driver” is an important factor in advancing the future of ESG as an integral part of investment portfolios.

“Interest in ESG investing is strong and building, and the survey suggests that investors would integrate these strategies even more extensively if they had more information about how they perform,” said Amy O’Brien, Global Head of Responsible Investing.

“More and more, market research is helping make the case that ‘responsible investing’ can deliver competitive returns, but clearly there is a need to put more effort into validating the investment proposition along with the positive impact,” she said.

Greater Focus on Inclusion & Diversity

Reflecting a year of heightened attention toward societal inequity, some institutional investors are considering enhancing their inclusion and diversity practices.

About four in 10 are planning changes to these practices in 2021. At the same time, one-third of investors were unsure about planned changes; 23% acknowledged that they have no changes planned.

Whether or not they actually plan any modifications themselves, investors agreed that inclusion and diversity enhancements should focus on talent management, including retention, hiring and promotion; reviewing and addressing diversity in decision-making bodies, such as boards and committees, and increasing accountability measures for the entire organization.

“That so many investment leaders are unaware of potential changes to inclusion and diversity policies perhaps signals that I&D discussions should be much better integrated into leadership and decision-making roles,” said Ms. O’Brien.

Pandemic Provokes Concern About Burnout— and Creates Efficiencies

The pandemic is not only motivating portfolio changes. The now year-old crisis also has provoked concern among large investors regarding their people’s mental wellbeing— while also compelling some innovations and new efficiencies in their day-to-day work.

Over half (54%) of institutions say they are concerned about the mental health of their employees, and four in 10 also cited burnout and stress levels as a top concern. More than half (56%) have responded with additional mental health support.

“Investment performance strongly depends on ‘human performance,’” said Mr. Perry. “We believe supporting mental health is becoming an essential means of maintaining peak performance in the workplace.”

Investors also have adopted new ways to work and realized some benefits along the way.
More than three quarters (76%) say they have discovered new ways to collaborate more effectively with digital technology.

Seven in 10 (71%) did not see any negative effects on their due diligence process from working remotely and 55% said in-person meetings may not be required to make investment mandate decisions going forward.

“2020 will likely forever change the way that investors work,” said Mr. Perry. “As asset owners and consultants navigate this changing landscape, they will discover new opportunities for partnership on stakeholder education, problem solving, investment insight, and transparency.”

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